When asked as part of an interview by CNN Money about the repercussions of a 35% tariff on imports from China as proposed by Donald Trump, UM Professor Alan Deardorff responded, “it would be a disaster.” This proposed tariff is just part of a larger conversation about the effects of trade, specifically the extent to which increasing trade, globalization, trade agreements, etc. are having harmful effects on the United States. UM Economics sat down with Alan to get his thoughts on trade and how it will factor into this year’s election.
How does trade affect the United States’ job market and individual workers?
Standard trade economics has always argued that increased trade, access to imports, etc., will have a net positive effect on countries overall; that is, we gain more than we lose. We gain, however, primarily through cheaper products to consume and also by being able to sell our exports to others and thus generate income here. The losers from trade are those that compete with imports or whose jobs disappear because equivalent production is being done abroad.
Recent studies by economists have been looking more carefully at the harm done to those who have been displaced by trade and found that the harm is much more long-lasting than we had supposed. It is simply not the case that most of the people who lose their jobs because of trade or off-shoring find other jobs that pay just as much within a short period of time. Some never do and are permanently hurt. It is still true that there net gains for the country as a whole, but the costs are more concentrated and more severe than we thought.
What can we do to solve or lessen the harm experienced by displaced workers?
There are two main approaches; one is that we don’t interfere. We don’t interfere with what’s causing this, with trade, with overseas investment, but that we do more to try to help those who are hurt by trade. I think almost universally among economists, this is what we would prefer, that we need policies to help those who are hurt. We have a policy that has that purpose; it's called Trade Adjustment Assistance (TAA). TAA has been on the books for a long time; it doesn't work very well, but it's better than nothing. Its provisions include giving trade-displaced workers money in the form of extended unemployment compensation. It also includes money for retraining for different jobs or for relocation to go to different places where the jobs are.
How does this tie into arguments made by opponents to trade?
Opponents of trade would say there just aren’t jobs, but that's not really true. Our unemployment rate has gone down to about as low as it ought to be. Clearly there are jobs somewhere, they just aren’t connecting with the people who are most hurt by this stuff, so if we could do more to help them get there, that would help. The opposite approach to dealing with this is to try to stop trade or place extremely high tariffs on certain countries. Presumably, if you really wanted to use a tariff to interfere with this trade, you’d eventually have to apply it to just about any country that has reasonably low wages, since a tariff on only one, such as China, would just shift production to other low-wage countries. If that happened, it would really be a disaster, because our country, like many others, has come to rely on trade much more than we did even 20 years ago, certainly more then we did 80 years ago.
What specifically do you think would happen?
It would look a lot like it did in 1930 when there was a huge increase in tariffs on imports called the Smoot-Hawley Tariff. To some extent that was a response to the depression and it certainly caused tremendous harm. If we put tariffs like that on our imports today, other countries will put tariffs on our exports. After the Smoot-Hawley Tariff, most industrialized countries in the world raised their tariffs in retaliation, first against us, and then each other, and that would surely happen today. In fact, it almost might be required, because we are a member of the World Trade Organization (WTO). As a member, we have promised, as have the other members, that we won't raise our tariffs above certain levels that we have committed to, which are pretty low in our case. One of the provisions of the WTO, the way it enforces that agreement, is by saying that if anyone breaks the agreement, others can file a complaint, and if they can't get the country to change its offending behavior, then other countries are authorized to retaliate by raising tariffs on that country’s exports. So if we were to raise our tariffs, we would be breaking WTO rules, and other countries could retaliate against us.
How would this affect the job market?
Trade would shrink quite a bit, both for us and for everybody else, and as a result that would eventually bring jobs back in the sense that we’d start producing the stuff here that we were previously importing. However, it would be a lot more costly for consumers, which is why we were importing these things in the first place. That would mean everybody would be worse off. In the interim, there would be a lot of jobs lost in our export sector because nobody would be buying our exports as much. So quite the opposite of bringing the jobs back, it would, for a while anyway, create job loss. Eventually, given time, we would adjust and get people back to work, but they would be working for lower real wages because of all this.
What are your thoughts on the Transpacific Partnership (TPP) and the role of trade in this election?
I was wrong about one thing: for several months now I've been giving talks about the TPP, which is this agreement that has been negotiated between us and eleven other countries on the Pacific to lower tariffs. All the candidates, I believe, have come out against it, and I've said that maybe this is a good thing because that means they won't be talking about it in the debates. But that’s not how it’s turned out. They're still talking about it. I think of any of the candidates, Hillary Clinton could and would get the TPP passed, even though she has said she doesn’t approve of it. John Kasich has said some positive things on trade, but all the other candidates have spoken negatively about it.
I worry about the prospects of the TPP, and I'm very concerned. I think with the TPP, on balance it is a good thing. While it has quite a few things about it that I don't like, they aren't as bad as I feared they would be, and it's got a lot of things about it that I do like. I would like to see it approved. But my greater concern is that, now that it’s been negotiated, what happens if it doesn't get approved by the United States? That would kill it, for one thing. But it also might kill the pro-trade orientation that most advanced and now even developing countries have had for the last 50, 60, or 70 years. The other eleven countries that we negotiated with will undoubtedly feel very offended that, they negotiated with us in good faith. We came up with an agreement where they were willing to give up some things that they weren’t happy with in order to get us to agree. If we turn it down, it's going to be terrible for our country's reputation amongst those countries and others. Also, it will kill any future trade agreements that we might get into.
I've never voted for somebody because of their trade policy, even though I’m a trade economist. I think there are a lot of issues, both political and economic, that are more important than trade, but this is partly because we've been pretty well behaved on trade. I never thought anybody would talk about a 35% tariff, and if they do that, then all of a sudden trade becomes more important as a basis for voting. The concerns by a large part of the public with international trade, the perception that we are in fact being put at a disadvantage by it, is pretty commonly felt by exactly the same people who are more than happy to shop at Wal-Mart and take advantage of it. I think trade was going to be an issue regardless of what candidates were saying.
Find out more about Alan and his work here!
Read $75 a day vs. $75,000 a year: How we lost jobs to Mexico from CNN Money.